Lessons from Sharepro: Can another share transfer fraud be averted?
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The quick and obvious answer to that question is no. Fraudsters are known to find chinks in the best of systems, and it will be foolhardy to assume that share/dividend transfer systems can be made foolproof.
Even so, the alleged fraud by share transfer agent Sharepro Services (India) Pvt. Ltd is a wake-up call for both companies that use such agents and for their regulator. Companies that choose to outsource this work to agents should take far more responsibility for this activity and put in place checks and balances. The Securities and Exchange Board of India (Sebi) should do its part by concluding investigations soon and slap errant executives with an exemplary punishment. Its interim order on Tuesday, which came after three companies filed their own police complaints, gives the impression that it has done too little, too late.
But first, the companies that were defrauded should pull up their socks to avoid a repeat. Sebi’s interim order states that in the normal course, it’s the company that instructs bankers to reissue dividend instruments in cases where the original warrant/demand draft was not encashed or was returned undelivered.
The regulator, however, found that some companies in good faith authorized Sharepro to directly issue such instructions to the bankers. These companies have no one but themselves to blame for such naivete.
Using a share transfer agent shouldn’t be viewed as any run-of-the-mill outsourcing work, since financial transactions are involved. The onus, therefore, lies with the company outsourcing the work to ensure that transfers are taking place to legitimate beneficiaries.
One way of doing this is to hire another agency or use in-house resources to communicate with shareholders and intimate them about dividend/share transfers. This way, any fraud being committed by the agency handling the actual transfer will come to light much sooner. Another tool is to have random audits done of share transfer agents.
Importantly, while Sebi has asked all clients of Sharepro to conduct an audit of the records and systems of their agent, even companies who use other agents should sit up and take notice.
Also, as pointed out earlier, the regulator has an important role to play by meting out exemplary punishment. Often, the regulator has been found wanting in this area. In the Sharepro case, too, it has taken over five months to come up with an interim order.
A reading of its order suggests that it had more than prima facie evidence, and hence could go beyond an interim order that only debars Sharepro’s executives from the securities market. The order is silent on the aspect of disgorgement of the illicit gains made by these executives. How else will defrauded investors be compensated? It would have been better to act sooner on this aspect of financial penalties, rather than leave this until a final order is pronounced.
Sebi can redeem itself by quickly issuing a final order on the matter. As it is, its practice of issuing interim orders and then taking months before issuing a final order needs to change.
Finally, if, as its investigations suggest, Sharepro executives have engaged in fraud, it should proceed with its own criminal action against these individuals. Swift justice will go a long way in acting as a deterrent against similar schemers.